Search

Firms covered by more analysts are more likely to become takeover targets and more likely to enter deals in which their acquirers initiate private merger negotiations. Moreover, when equity analysts’ pre-acquisition price forecasts imply greater target undervaluation, target firms are more likely to initiate their own sale, takeover premiums are higher, those premiums tend to be revised upwards during private merger negotiations, and acquirer firms use less cash to structure the transaction. These results imply a material role for equity analysts during the M&A process: their coverage affects takeover probabilities while their price forecasts influence merger premiums and the merger consideration. Our findings support both investor recognition and information generation theories about the role of equity analysts in financial markets.

We examine the causal effects of uncertainty on corporate innovation by exploiting terrorism events. During the five-year window after terrorist attacks, firms near the strikes experience meaningful declines in R&D spending, patenting, citations, patent originality, and innovation value. These firms are more likely to have inventors move to distant companies but less likely to hire new inventors. These results prove robust to numerous controls including the influence of the 9/11 attacks. Our findings suggest that terrorism curtails innovation by aggravating the economic uncertainty affecting firms near the attacks and by worsening the uncertainty about personal security faced by their inventors.

We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the U.S. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.

Do merger bonuses to target CEOs facilitate a wealth transfer from target to acquirer shareholders? We test this hypothesis against an alternative that bonuses enable a useful contractual revision in compensation contracts when takeovers generate small synergies. When target CEOs get a merger bonus, acquirers pay lower premiums, but they also typically get less in the form of low synergies. Moreover, both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative. Nevertheless, wealth transfer occurs when merger bonuses are present in deals where targets exhibit high pre-takeover abnormal accruals or are subject to SEC enforcement actions.

Acquirer CEOs with experience in the target's industry supply chain (‘supply chain CEOs’) are associated with wealth effects of first-order importance: they earn 1.5% higher merger announcement returns. Conversely, their targets get a lower share of the merger gains. Acquisitions by supply chain CEOs also exhibit higher synergies, better post-deal accounting performance, and less goodwill written off. These findings withstand checks for endogeneity, anticipation bias, and numerous robustness tests. In takeovers by supply chain CEOs, superior acquirer performance stems from both value creation and rents negotiated away from target shareholders.

Firms exhibit a US$106MM average market capitalization decline when a Securities Class Action lawsuit against their joint venture partner is announced. After their partner’s lawsuit, their own probability of facing similar litigation increases from 4.12% to 7.52%. Such litigation is 1.3 times more likely for every common monitor (auditor, institutional blockholder, or analyst) non-sued venture firms share with their sued partner. Other spillovers to non-sued venture firms substantially affect their financial reporting practices, their investment policies, and their assessment by both analysts and auditors. While these venture firms are not named in their partner’s complaint, they suffer non-trivial spillover effects.

Full Paper is available at: https://www.ssrn.com/abstract=2526509 In this Internet Appendix, we perform further tests in order (i) to assess the robustness of the main findings, (ii) to evaluate whether the magnitude of our results changes in different settings, and (iii) to provide further insight on our main empirical constructs.

Reducing the threat of shareholder litigation through securities class actions lowers voluntary disclosure quantity, but not the accuracy of earnings forecasts. Conversely, reducing the threat of shareholder litigation through derivative lawsuits prompts increases in voluntary disclosure quantity and decreases in both earnings forecast accuracy and mandatory disclosure quality. We reconcile these differences by showing that changes to firm operations are the economic mechanism driving changes in corporate information environments after the threat of derivative lawsuits exogenously declines. This evidence comports with the fact that, while securities class action lawsuits address disclosure decisions, derivative litigation also covers decisions about real operations.

We study earnings surprises disclosed hours before M&A announcements in which both merging firms operate in the same 1-digit SIC as the earnings-releasing firms. These surprises correlate with the acquirers’ M&A announcement return. Consistent with behavioral theory, one week after the M&A announcement, acquirers’ response to the earnings surprises disappears. While acquirers’ stock misvaluation is transitory, other effects to the M&A process are permanent. Larger earnings surprises are related to increases in bid competition, in takeover premiums, and in withdrawn M&As. These results indicate that behavioral biases, characterized by trend-seeking and extrapolation, generate material distortions in some M&A transactions.

We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the US. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.

Targets covered by more analysts receive higher takeover premiums while their acquirers earn lower merger announcement returns. Moreover, these targets are less likely to pay merger termination fees. These results suggest that managers of target firms covered by more analysts are able to bargain for better acquisition terms for their shareholders. To address the analyst-coverage selection bias, we use natural experiments involving brokerage-house mergers or closures to instrument for analyst coverage. Our empirical evidence supports Jensen and Meckling’s (1976) theory that monitoring by security analysts mitigates the agency costs associated with the separation of ownership and control by curbing non-value maximizing managerial actions.

Using transactions generally overlooked in the compensation literature—joint ventures, strategic alliances, seasoned equity offerings (SEOs), and spin-offs—we find that, beyond compensation for increases in firm size or complexity, chief executive officers (CEOs) are rewarded for their deal-making activities. Boards pay CEOs for the core motivation of the deal, as well as for deal volume. We find that compensating for volume instead of core value creation occurs under weak board monitoring and that in deal-making firms, neither CEO turnover nor pay-for-performance responds to underperformance. We introduce an input monitoring explanation for these results: boards compensate for deal volume because of their inability to perfectly monitor outputs.

Acquirers do not benefit from hiring the CEOs of firms they buy, either in terms of merger announcement returns or long-run operating performance. This is especially true when the retained CEOs exhibit inferior quality (as proxied by target firm industrial efficiency or the target CEO’s educational aptitude, pay slice, or outside directorships). We find no evidence that our results are due to hard bargaining by target managers: premiums paid in M&A deals appear unrelated to the decision to hire the target CEO. These findings withstand several econometric methods we use to account for potential endogeneity, selection, and unobserved heterogeneity.

Shareholders’ updated valuation of internal slack reveals their revised assessment of potential agency conflicts. We study how the value of internal cash changes following state antitakeover regulation events. After carefully addressing the critiques of such experiments, we find that the value of cash increases following antitakeover law implementation, but there is considerable heterogeneity in how the value changes. Firms more susceptible to quiet-life agency problems show no increases in the market-assessed value of internal slack. Conversely, cash appreciates in companies where takeover protection helps bond important commitments with major counterparties. These findings hold across different measures of antitakeover protection events.

Through textual analyses of 7.7 million patents, we develop a novel intercompany innovation similarity measure which enables us to find that technologically connected firms cross-predict one another’s returns. Investors impound information about firms’ technological connectedness, although not immediately and fully. Buying (shorting) shares of technological peers earning high (low) returns during the previous month yields a 1.29% monthly return. Firms’ return predictability increases with patent complexity or limited technological disclosures but decreases with better information transparency. These results suggest investor inattention explains technology momentum. Unlike momentum stemming from simpler class-based technological links, our Big Data text-based return predictability remains active.

We investigate the determinants of gains to CEOs from large stock sales. Consistent with the literature, we find that some CEOs benefit from inside information by strategically timing sales. We also find that internal accounting information can be used to predict such timing. Furthermore, sales executed under plans that conform to SEC Rule 10b5-1 tend to follow positive abnormal stock returns, but do not, on average, precede abnormal declines. In contrast, sales that do not conform to the requirements of Rule 10b5-1 tend to follow smaller positive abnormal stock returns, but, on average, precede large abnormal declines. Board and CEO characteristics are related to the magnitude of the post-transaction abnormal returns. Overall, the evidence suggests that Rule 10b5-1 plans do not prevent CEOs from timing large sales or the release of discretionary information around them.

Submillimeter common user bolometer array (SCUBA)-2 is a wide field sub-mm bolometer camera designed to replace the existing SCUBA instrument on the JCMT in Hawaii. It will be many hundreds of times faster in large area mapping than SCUBA and will also go deeper in a single frame. It will enable the many discoveries of SCUBA to be followed up with deep systematic surveys and help act as a pathfinder for the ALMA interferometer. The key technologies for making the arrays have been demonstrated and will be put together to fabricate the first prototype later this year (2003). The wide field nature of the SCUBA-2 bolometer camera, combined with the diffraction limit at sub-mm wavelengths, leads to physically large focal planes where the issues of stray light control, magnetic shielding, and electrical, thermal and mechanical connection must be carefully addressed in order to realise a successful instrument. We describe the solutions we have adopted for these problem areas.

Studies of institutional monitoring focus on the fraction of the firm held by institutions. We focus on the fraction of the institution’s portfolio represented by the firm. In the context of acquisitions, we hypothesize that institutional monitoring will be greatest when the target firm represents a significant allocation of funds in the institution’s portfolio. We show that this measure is important in reconciling mixed findings for total institutional ownership in the prior literature. The results indicate that our measure of institutional holdings leads to greater bid completion rates, higher premiums and lower acquirer returns. This empirical evidence provides support for theories predicting a beneficial effect of blockholders in monitoring the firm in general and in enhancing the gains to takeover targets in particular.

We examine the hypothesis that advertising allows a takeover target’s management to increase the firm’s profile and their own negotiating power, leading to higher subsequent takeover premiums. Our evidence from 7,095 merger bids supports this hypothesis. Moreover, we find an economically significant decrease in the acquirer’s market capitalization during the announcement period. To consider the possibility of codetermination of target advertising and takeover premiums, we employ instrumental variable tests as well as propensity matching methods and our results hold. Further, we find targets that advertise are more likely to be pursued by multiple bidders and receive revised increased bids.

Do merger bonuses to target CEOs facilitate a wealth transfer from target to acquirer shareholders? We test this hypothesis against an alternative that bonuses enable a useful contractual revision in compensation contracts when takeovers generate small synergies. When target CEOs get a merger bonus, acquirers pay lower premiums, but they also typically get less in the form of low synergies. Moreover, both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative. Nevertheless, wealth transfer occurs when merger bonuses are present in deals where targets exhibit high pre-takeover abnormal accruals or are subject to SEC enforcement actions.

Analyses of bank performance around the 2007-2008 financial crisis suggest that outside directors with financial experience acquired through longer board service at their own banks are more effective than those with financial experience attained elsewhere. Institutions with more long-tenured independent directors (i) earn higher CARs around the collapse of both Bear Stearns and Lehman Brothers, (ii) limit their risk exposure before the crisis, (iii) exhibit better stock return and accounting performance during the crisis, (iv) are less likely to be bailed out by the U.S. government’s Troubled Assets Relief Program (TARP), and (iv) receive proportionally less financial assistance from TARP.

We examine completed MA (ii) transaction-specific events (not firm- nor CEO-specific events); (iii) enhanced by synergies from a strategic fit in the supply chain; and (iv) executed by bidders with high valuation multiples. Our analyses also document a link between financial accounting reporting irregularities and subsequent merger performance. These findings provide important insight into the factors associated with considerable wealth creation for acquirer shareholders in M&A deals.

Acquirer CEOs with experience in the target’s industry supply chain (‘supply chain CEOs’) are associated with wealth effects of first-order importance: they earn 1% higher merger announcement returns. Conversely, their targets get a lower share of the merger gains. Acquisitions by supply chain CEOs also exhibit higher synergies, better post-deal accounting performance, less goodwill written off, and a lower probability of target-payable termination fees. These findings withstand checks for endogeneity, selection, unobserved heterogeneity, anticipation bias, and numerous robustness tests. In takeovers by supply chain CEOs, superior acquirer performance stems from both value creation and rents bargained away from target shareholders.

In a large sample of publicly traded firms during 1998-2006 we find that companies donating to charity display weaker governance, excess free cash flow, lower market-adjusted returns and a higher propensity to be defendants in class action fraud lawsuits. Giving CEOs receive $1.4 million in additional compensation and extra perquisites but are less likely to be dismissed for poor performance. Consistent with Jensen and Meckling (1976), our results indicate that corporate philanthropy proxies for residual agency problems: when managers have discretion to give the firm’s money away to charities, firms face severe agency problems.

Using transactions generally overlooked in the compensation literature — joint ventures, strategic alliances, SEOs, and spinoffs — we find that, beyond compensation for increases in firm size or complexity, CEOs are rewarded for their deal-making activities. Boards pay CEOs for the core-motivation of the deal, but also for deal volume. We find that compensating for volume rather than core value creation occurs under weak board monitoring and that in deal-making firms, neither CEO-turnover nor pay-for-performance responds to underperformance. We introduce an input monitoring explanation for these results: boards compensate for deal volume because of their inability to perfectly monitor outputs.

We investigate the reputational impact of financial fraud for outside directors based on a sample of firms facing shareholder class action lawsuits. Following a financial fraud lawsuit, outside directors do not face abnormal turnover on the board of the sued firm but experience a significant decline in other board seats held. This decline in other directorships is greater for more severe allegations of fraud and when the outside director bears greater responsibility for monitoring fraud. Interlocked firms that share directors with the sued firm also exhibit valuation declines at the lawsuit filing. Fraud-affiliated directors are more likely to lose directorships at firms with stronger corporate governance and their departure is associated with valuation increases for these firms.

In this paper we show that when bidders are in the S&P 500 Index, risk arbitrage portfolio returns are 85 percent larger than when they are not. We also show that acquisitions by S&P 500 buyers are more likely to be completed, and take less time to complete, than are deals by different buyers. These results indicate that risk arbitrage returns can be extended by strategies involving S&P 500 bidders. In addition, we find share price runups followed by price reversals on all buyer types when stock, and not cash, is used as currency for the acquisition. This phenomenon occurs around merger completion, which is a non-information day. Thus, our finding documents that the buyers' short-run demand curve exhibits inelastic behavior, and is evidence in support for Scholes' (1972) price-pressure hypothesis.

The reciprocal interlocking of chief executive officers (CEOs) is a non-trivial phenomenon of the composition of boards of directors and of corporate governance: among large companies in 1991, about one company in seven was part of a relationship whereby the CEO of one company sat on a second company's board and the second company's CEO sat on the first company's board. We are aware of no previous efforts to explain these reciprocal relationships. We hypothesize that reciprocal CEO interlocks are (a) more likely when a board has more outside directorships, (b) less likely when a CEO has more of his total annual compensation paid in the form of stock options, (c) less likely when a company's board is more active and holds more meetings, (d) less likely when a CEO has a larger ownership share of his company, and (e) more likely when there are more CEOs from other companies as outside directors on a CEO's board. Using a sizable sample of large companies in 1991, we employ simple probit and step probit models to test these hypotheses, with the use of control variables that encompass other company, board, and CEO characteristics. These multivariate analyses support our first three conjectures but do not support the remaining two. Since there is considerable academic and policy debate concerning board composition and the effectiveness of interlocking directorships in general, investigations focusing on reciprocal CEO interlocks, which link the highest ranked executives of two different firms, represent a significant contribution to the knowledge base in this field.